I read this early/mid 90's, the book I am looking for is a collection of illustrated short stories. The book itself was large in size (oversized) and filled with illustrations. I read the Indonesian translation, but I believe it is translated from English. I think the title of the book itself contained some variation of the word "Giant Picture book" or something to that effect. Some plot elements involve:
- a village of dwarves being invaded by a tribe of dragons (I think they are non-flying dragons)
- an all-out war was about to break out, with each side preparing an army with siege engines, etc. There's a whole page dedicated to showing different army units.
- one of the dragons ate some sort of herb and gained the ability to fly (or breathe fire)
- the dwarves sent a saboteur group consisting of caterpillars to eat away the wings of said dragon while he was sleeping
- the fight between the dwarves and the dragons ended up being decided by a tug-of-war contest, in which a Fairy figure intervened and used a giant prism to burn the middle of the rope
- there's also side stories about 7(?) fairies visiting the dwarves' village and one of them ended up being transformed into a mermaid, and one of them was killed while transformed into a songbird form.